24 August 2009

Can't Even Make Fun Of Ireland Anymore

Massachusetts General Laws Chapter 272: Section 36. Blasphemy
Whoever wilfully blasphemes the holy name of God by denying, cursing or contumeliously reproaching God, his creation, government or final judging of the world, or by cursing or contumeliously reproaching Jesus Christ or the Holy Ghost, or by cursing or contumeliously reproaching or exposing to contempt and ridicule, the holy word of God contained in the holy scriptures shall be punished by imprisonment in jail for not more than one year or by a fine of not more than three hundred dollars, and may also be bound to good behavior.

22 August 2009

In Which We Try To Be Informative And Constructive

If you manage to find a supporter of nationalized health care to debate, and you manage to move them past "fascist dupe," they often point out that we have rationing, of a sort, now. Health insurance companies won't pay for certain procedures on the basis that they're not cost effective, or are experimental, or some such. "Wouldn't you rather," they say, "have these decisions made by government."

"No, I bloody well wouldn't," you respond. Correctly. But why wouldn't you? In addition to our well-founded suspicions of government, which the left share in most other situations, there are several tangible reasons not to want to fight with the government.

Now, if you and your health insurer disagree about a treatment, you go through a relatively simple internal appeal, they deny you coverage, and then you sue them in federal court. (You get to go to federal court because most people get their health care through their employer and employee benefits are regulated by ERISA, a federal law. If you buy your insurance directly and get to go to state court, that's even better for you and yet another advantage lost to nationalized health care.)

If the government denies you coverage, you get to appeal, in the first instance, to an Administrative Law Judge. Despite his title, an ALJ is not a judge. He is an executive branch bureaucrat, answerable to the same agency hierarchy that made the decision to deny coverage in the first place. Now, so far this isn't too much different than the private sector internal appeal. But there are differences. First, ALJ proceedings, in my experience, take longer than internal appeals. Second, health insurer appeal panels tend to include practicing doctors, so there's some chance of a favorable verdict. ALJs will be lawyers, not doctors, beholden to the agency for reappointment (they serve for a fixed term (6 years, usually) and not for life). So there's somewhat less chance of a favorable result.

But the real difference comes when you go to court. Now, we don't know what the final statute is going to look like, so I'm going to assume that you will be able to appeal the ALJ's decision to the district court for determination de novo, that is, without the court deferring to the decisions of the ALJ. If you have to appeal to a federal appeals court, or if the court has to defer to the findings of fact of the ALJ unless they are clearly erroneous, then you are sunk. If you sue a private insurer, you just have to prove that your version of the facts is more likely than not.

If you sue your private health insurer, you'll go in front of a federal judge who, probably, doesn't particularly like insurers. In other words, a lawyer. Even if he doesn't hate insurers, he is the judge; he won't want to defer to the company. (Does ERISA suggest that the judge should defer to the company's denial? Arguably, but I've done a lot of ERISA work and, believe me, they don't.)

If you sue the federal health provider, on the other hand, the judge -- a federal employee -- is now meant to second-guess the workings of other federal employees. Is he going to treat them the same way he treats insurers? No way. In fact, he shouldn't. Even if the judge doesn't have to defer to the factual findings of the ALJ, he must defer to the expertise of the agency within the scope of its mandate and to its legal interpretation of its own regulations and establishing statute. So if the agency says that, as a matter of law, grandma doesn't get her hip replacement, then the judge must accept that decision unless it is arbitrary. Which it never is.

If you sue a private insurer, you can argue that they are estopped from denying coverage. That is, that they told you there was coverage in this situation, you relied on the statement to your detriment, and now they're not allowed to change their mind even if the first statement was wrong. You can never estop the government. (There is an argument under ERISA that you can't estop insurers, but I don't think that's the prevailing law. In fact, this is a nice example of how judges give private insurers less latitude than they'd be forced to give to a public insurer.)

If you sue a private insurer, then the court will construe any ambiguity in the policy -- and there is always ambiguity in an insurance policy -- against the insurer. If you sue the government, the court will defer to the government on how any ambiguity should be construed.

Judges have no hesitation to order insurers to spend money. Although they will do it, judges are supposed to be reluctant to order the government to do anything.

Basically, this comes down to the question, would you rather sue a private company or would you rather sue the government. You'd much rather sue a private company.

19 August 2009

Why Don't People Disbelieve Obama Now?

One thing that's always struck me as strange about President Obama's supporters is the extent to which they support him because they think that he's lying about key policy positions. The best example of this is gay marriage: Obama announced that, as a Christian, he believes that G-d has mandated that marriage be the union of one man and one woman. The people who vociferously support gay marriage (Andrew Sullivan leaps to mind) shrug and tell each other, "he has to say that, but we know that he's lying." Robert Wright has said much the same thing about Obama's professed belief in Jesus. Wright can just tell that, in private, Obama is an atheist. I don't remember a candidate for whom perceived lying has been such an important selling point.

So why, I wonder, are people starting to believe him now. His real problem with the public on this lunatic idea of nationalizing health care (or the 2/3's of health care not already nationalized) is not that it's lunatic, but that he promises to cut spending. Since seniors have realized that cutting spending translates to not giving them hip replacements on demand -- the single most common surgery under Medicare -- they're up in arms. But isn't this just a completely transparent lie?

I don't know if Obama is really a Christian. I don't know if his religion forces him to oppose same-sex marriage. Pretty much, I'm with the courts. All we can know is what people say and do, so I have to give Obama the benefit of the doubt here. But one thing I'm sure of is that there is no way nationalized medicine is going to cut costs. The evidence from every other government welfare program, as well as common sense, is clear: the government is going to spend, spend, spend. Obama knows this perfectly well. He's clearly lying when he says that we're going to drive down the cost curve. No matter where the line is drawn on spending, some cute little kid or gray-haired Nana is going to fall just outside. The papers will have a field day, politicians will pontificate and bureaucrats will soon learn that the only downside is denying care. Pretty soon, we'll be looking back wondering how the 10-year cost appraisal could have been so wrong.

But I'm still puzzled: why do so many people suddenly believe the President the one time he is clearly lying?

12 August 2009

"That's What Gods Do"

Again with the idea that finding a biological explanation for belief would make it less likely that G-d exists. The truth, of course, is that such a biological foundation for belief would be weak evidence in favor of G-d's existence. It is more likely that G-d would create us with the biological ability to believe in Him than that such an ability would develop randomly. Thus, the existence of such an biological ability is somewhat more consistence with G-d's existence than not.

Health Care And Trust

I just saw this passage, quoted from a supporter of nationalized health care, over at Just One Minute:
What we're seeing here is not merely distrust in the House health-care reform bill. It's distrust in the political system. A healthy relationship does not require an explicit detailing of the "institutional checks" that will prevent one partner from beating or killing the other. In a healthy relationship, such madness is simply unthinkable. If it was not unthinkable, then no number of institutional checks could repair that relationship. Similarly, the relationship between the protesters and the government is not healthy. The protesters believe the government capable of madness. There is no evidence for that claim, which means that there is no answer for it, either.
In my field, we divide trust into three different types (Barney & Hansen, 1994). The first, called weak form trust, results from two parties in a relationship not being vulnerable to each other. This is really more indifference than trust. The second, semi-strong form trust, is where two parties to a relationship trust the other party to do what they have agreed to do; this is the trust of contract law, enforced by formal governance and law. Strong form trust, the third form, is where the parties have the power to act opportunistically, but trust each other not to. We see this mostly in very good friendships and strong marriages. Arguably, just having a joint checking account is strong-form trust.

There are Americans who don't trust the government at all. But I think the main stream American attitude towards the government -- which is to say, towards our fellow citizens -- is to trust the government to do what it is legally bound to do, and no more. It is inconceivable to me that many Americans could have strong-form trust in the government; that many Americans believe that, in situations in which it can act opportunistically, that shifting set of coalitions we call a government will act in their own best interest. Of course, that I believe that strong-form trust in the government is inconceivable is likely tied to my preference for limited government.

Given my semi-strong form trust in government, nationalized health care seems like a bad joke. There are two many situations that will occur that we haven't, and can't, tie the government's hands. There are too many ways that the government, or the controlling coalition of the day, can act opportunistically and little chance that it won't. We need only look at the public schools -- where opportunistic choices are routinely made for the benefit of the teachers and administrators -- to understand my worry about a decision to (strong-form) trust the government with my family's health care and 14% of the economy.

08 August 2009

The Point Of Statistics

It strikes me as worth saying, because I don't see it out there very often, that the only point of statistics is to try to determine whether an apparent difference between two sets of data is a real difference rather than simply an artifact of error and randomness.

Also, that statistics is a fairly blunt instrument and no one study "proves" anything. All generalizations from studies are a leap of faith, albeit some more than others.

06 August 2009

The Mystery of CEO Compensation

Over at the Daily Duck, a discussion of minimum wage laws slopped over into a discussion of CEO compensation because ... because ... well, it just did. Harry complained that CEOs are overpaid and I responded that, given sales and revenues, American CEOs are modestly paid. I offered to look at particular companies and see if their CEO compensation was high, or modest. Harry suggested looking at Duke Power, Bank of America and Four Seasons Hotels.

Before we get to that, though, I though that it might be useful to look at the role of the CEO and why CEOs are well-paid. The problem is that we -- and by "we," I mean people who study organizations -- don't really know, because we don't really know what CEOs do.

My own area of org. studies is Strategic Management, which expressly tries to determine why some firms outperform other firms. This is a relatively new area of study -- Strategy dates back to about 1980 -- but we do know some things. We know that the overall economy plays a large role in organizational performance and that the industry firms are in plays an even larger role. So, right away, we know of two important factors in organizational performance where CEOs, seemingly, can't make much of a difference.

There are at least two strands of Strategy, the deterministic school, that say, more or less, that the particulars of the individual firm have almost nothing to do with performance. The Industrial Organization school (representated by Michael Porter and pushed most energetically at Harvard) basically says that, over time, firm performance is a function of five industry level forces: competition, suppliers, customers, new entrants and substitutes. Over the long run, all the firms in an industry will earn the same return and look the same. Strategy is limited to industry level actions, like trying to get the government to prohibit new entrants into the industry. In this world, having one CEO or another doesn't make much difference.

The other deterministic school are the Pop Ecologists (most notably, Hannan & Freeman (1977), if you want to Google them), who basically apply biologically derived population rules to organizations. Again, performance results from the environment, rather than from any choice the firm makes.

I tend to believe, however, that strategic choice (Childs, 1972) does make a difference, and there is some good research to back me up. Although the research confirms that industry level and business level effects are important, they also show that corporate level effects made a difference. The best of these studies (Misangyi, et al, 2006) found that differences between businesses accounted for about 37% of observed variation in performance, while industry and corporate effects both accounted for about 14% of observed variation. (Although it might not be obvious, this is also how we know that related diversification, particularly if the related businesses can share a valuable, unique corporate resource, makes more sense than unrelated diversification. It's pretty clear that the returns from one business do not say anything about the expected returns from another co-owned business in an unrelated industry).

If corporate differences explain about 14% of the difference in returns, then we might think that choosing one CEO over another could only effect a portion of that 14%. I'd argue, though, that the CEO in a large, complex business -- and the businesses Harry suggested we look at are all large and complex -- is somewhat more influential than that. The CEO, after all, is ultimately responsible for deciding what industries the corporation will compete in (acquisitions and divestitures are decisions classically made by the CEO personally). Thus, the industry level effects are, in part, attributable to the CEO. Similarly, the CEO is ultimately responsible for steering corporate resources to one business or another, so the CEO is also responsible, in part, for the business level variation in performance.

On the other hand, the compensation question isn't really, how important is having a CEO to corporate performance. The question is, how important is having this CEO instead of some random, but lower paid, CEO. In other words, how much better is performance because the organization has this CEO and is it worth paying him a lot of money to keep him.

That's a question we can't answer (although my own research, which I'm going to be presenting to the Academy of Management next Monday, suggests that new CEOs reduce organizational returns for about 2 years after they take office because they just can't stop themselves from fiddling with things that aren't broken). There is a fairly large subset of Strategy that argues that the top-management team is the most important determiner of strategy, and thus performance (Hambrick & Mason, 1984). That research has looked at demographic characteristics of the CEO and TMT and has found consistent statistically significant effects on performance. Those effects, however, have been pretty small, explaining about 1% of the observed variance across organizations (Certo, et al 2006). Since we don't know which CEO characteristics, if any, really make a difference, and because organizations are reluctant to change CEOs as part of an academic experiment, we can't really say how much difference CEOs make.

Furthermore, it's not clear that the market has any better idea of what goes into making a good CEO. In fact, it's pretty clear that the market for CEOs is not efficient. The small number of CEOs hired every year, along with the opportunities for opportunism, ensure that (Arrow, 1974; Williamson, 1975). Given that the relationship between CEO identity and performance is, at best, causally ambiguous, it seems clear that the CEO (e.g., Steve Jobs, Jack Welch) can be a unique strategic resource that allows for above-average returns while other CEOs can have neutral or even negative effects on performance. This sort of small number, highly opportunistic, causally ambiguous, high transaction cost issue is exactly where we would expect the market not to function well and, in fact, we don't see companies bidding to pay a market-clearing price for CEOs. Rather, we'd expect to see what we do see, a bureaucratic, path-dependent, authoritarian mechanism for hiring and compensating CEOs. (This is also why government regulation won't make any difference; we already have a regulatory approach and no reason to think the government would do it any differently.)

Having said all that, let's look at the three companies Harry suggested (which I'll probably do over time, since I'm incredibly busy getting ready from the AOM and then comps).

1. Duke Energy.

Duke Energy's 2009 Proxy Statement is here and includes, starting on page 22, a really excellent discussion of its executive compensation policy. This is, in fact, an odd choice for Harry to have made, because this is a state-of-the-art compensation policy that touches all the right bases. It also includes, starting on page 39, a separate discussion of the CEO's compensation. In 2008, it shows that the CEO, James Rogers, received a salary of, um, $0. He received a bonus of $0. Duke Energy has decided to base their CEO compensation entirely on long-term results by giving him various forms of stock grants that he's not allowed to sell for several years after receipt. Based on various objective and subjective factors, the compensation committee awarded him about 80% of the shares he could theoretically have received had Duke exceeded all of its goals. This included a 5% stock bonus due to the fact that no work-related employee or contractor fatalities in 2008, which strikes me as an astonishing achievement for a utility company. All in all, Mr. Rogers received stock worth about $5.5 million, none of which he could sell for years. His pension increased in value by $300,000, which Duke counts towards compensation but I probably wouldn't. He received other compensation worth almost $525,000 (health insurance, flying on the company planes, etc.) for total compensation worth $6.3 million. Duke Energy's sales in 2008 were $13 billion and net revenue was $1.3 billion. Paying the CEO $5.5 million in stock he can't sell strikes me as perfectly reasonable and certainly not outrageous. Also, I can't emphasize enough how impressive the report by the compensation committee is; this is gold-plated corporate governance.

Still to come, Bank of America and the Four Seasons.